Midterm election years carry more than their fair share of headlines, but how should we expect markets to react?
The midterm election day is 10 weeks from today. Midterm elections carry an odd duality. They can pass as a virtual non-event – a formality on the way to the next presidential cycle – or they can mark a genuine turning point that reshapes the political backdrop for the final two years of a presidential term. That raises a fair question for investors: does any of this actually matter for the stock market?
SPX Return by Presidential Term Year
We took the S&P 500 Index (SPX) back to year-end 1927 and organized returns by year of the presidential term. Because the current cycle puts us in year two of the president's term, 2026 marks the 25th midterm election year in that dataset (1930 through 2026). Of the prior 24 occurrences, 11 fell under a Republican administration and 13 under a Democrat, which reinforces that midterm-year performance is driven far more by where we sit in the four-year cycle than by which party holds the White House.
The averages make the case clearly. Year two of a presidential term has produced an average SPX return of just 3.68% – barely half the 7.02% average posted in year one, and well behind the 8.12% average in year four (the presidential election year itself). Year three is in a class of its own, averaging just under 14% (13.96%), by far the strongest year of the four-year cycle.
The pattern lines up with what we would expect intuitively. Policy optimism that greets a new administration in year one begins to fade by year two, midterm elections introduce a fresh round of political uncertainty, and once the midterms are behind us, that uncertainty clears the runway for year three's outsized gains.
SPX Return by Presidential Term Quarter
The story gets more interesting once the data is broken down by quarter. Looking at average quarterly returns by presidential term year, there is a clearly muted stretch that begins in the third quarter of year one and doesn't let up until after the third quarter of year two – five consecutive quarters where SPX has averaged less than a 1% return. Within that stretch, the second and third quarters of year two stand out as the weakest of the entire four-year cycle, both posting slight losses on average.
But the fog tends to lift quickly once the fourth quarter of the midterm year arrives. SPX has historically averaged a notably stronger return in Q4 of year two, and that improvement carries straight through into the first and second quarters of year three. In other words, the same “October bottom” dynamic we highlighted in our March 2026 midterm volatility feature holds up across the full 96-year dataset. Even if we see a decline before the midterms this year, that often paves the way for strength once the uncertainty is alleviated post-midterm season.
25 Years of Year 2 Returns
Averages tell a clean story, but they can also paper over how much variation exists from cycle to cycle. The beginning of this year saw SPX drop over 4%, similar to what we saw in the first quarter of 2022. However, instead of falling another 16% in Q2 (like we saw in 2022), the S&P 500 rocketed higher by 14%. The averages can be helpful to understand the general directional moves over time, but they rarely tell the whole story. Looking at the actual quarterly returns across all 25 midterm years since 1930 (see table below), a few patterns stand out.
The percent of positive quarters climbs steadily as the year progresses. Q1 has been positive in only 44% of midterm years, improving to 52% in Q2, 58.33% in Q3, and a much stronger 83.33% in Q4 – the clearest evidence yet that the fourth quarter tends to be the turning point for midterm-year markets.
Only 8 of the 24 completed midterm years have seen SPX post a gain in both the first and second half of the year, underscoring just how choppy these years can be even when the full-year number ultimately lands in positive territory.
The second half of a midterm year has been positive in 15 of the past 24 occurrences (62.5%), and in 10 of those years, the second half posted a double-digit gain, showing that when the back half of a midterm year turns positive, it often does so emphatically.
Looking only at the first half returns, 2026 seems to be breaking the mold from what we typically see in midterm election years. However, we have seen our fair share of uncertainty. A rocky first quarter (-4.63%) gave way to a strong second quarter (+14.87%) and a more normal third quarter (+2.33%, so far). This is right in line with the broad historical pattern of markets finding their footing as the midterm year progresses. If history is any guide, the real test – and the real potential opportunity – still lies ahead in the fourth quarter.
